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ISAS InsightsNo. 79 Date: 28 July 2009

469A Bukit Timah Road

#07-01, Tower Block, Singapore 259770Tel: 6516 6179 / 6516 4239Fax: 6776 7505 / 6314 5447

Email: [email protected]

Website: www.isas.nus.edu.sg

Indias Foreign Direct Investment Flows:Trying to Make Sense of the Numbers 1

Sasidaran Gopalan and Ramkishen S. Rajan2

One of the noteworthy dimensions of Indias increasing integration with the world economyhas been the increase in both gross foreign direct investment (FDI) inflows into and outflows

from the country over the last decade. The simultaneous spurt in both FDI inflows and

outflows has meant that FDI has not been a significant source of balance of payments

financing on a net basis, at least until 2006 (Figure 1). The rise of India as a source and host

of FDI has begun to generate a sizeable literature on the determinants and characteristics of

such flows at an aggregate level. However, much less work has been devoted to the analysis

of FDI inflows and outflows at the bilateral level, primarily due to the paucity of data.

1. Data Concerns

To be more specific, the data on bilateral FDI outflows is rather sketchy; the Ministry ofFinance reports the value of aggregate FDI outflows from India and the value of approvals of

FDI outflows at a bilateral level.3

However, a consistent time series of the actual value of

outflows with a country-wise breakdown does not seem to be available in the public domain.4

While data on actual FDI inflows is reported by the Department of Industrial Policy and

Promotion (DIPP) at a disaggregated country level,5

there are serious concerns about the

usefulness of the bilateral FDI inflows data that is available in the public domain.

1

This paper builds upon initial work in R. S. Rajan, Outward Foreign Direct Investment from India: Trends,Determinants and Implications, Institute of South Asian Studies, Working Paper No. 66, June 2009.

Assistance with the merger and acquisition data by Rabin Hattari is gratefully acknowledged.2 Sasidaran Gopalan is a Research Associate at the Institute of South Asian Studies (ISAS), an autonomous

research institute at the National University of Singapore. He can be contacted at [email protected].

Ramkishen S. Rajan is a Visiting Senior Research Fellow at ISAS and an Associate Professor at George

Mason University, Virginia, United States. He can be contacted at [email protected] or [email protected] This information is available from the Department of Economic Affairs, Ministry of Finance, India,

accessible at http://finmin.nic.in/the_ministry/dept_eco_affairs/dea.html.4

Only since April 2008 has the Reserve Bank of India started publishing this information (actual value of FDI

outflows from India with a country-wise breakdown) in an article titled, Indian Investment Abroad in Joint

Ventures and Wholly Owned Subsidiaries in its monthly bulletin. Accessible at http://rbidocs.rbi.

org.in/rdocs/Bulletin/PDFs/83887.pdf.5

This information is available in the various issues of the Secretariat for Industrial Assistance newsletterscompiled by the DIPP, Ministry of Commerce & Industry, India, accessible at http://siadipp.nic.in/publicat/pub_mn.htm.
http://finmin.nic.in/the_ministry/dept_eco_affairs/dea.htmlhttp://finmin.nic.in/the_ministry/dept_eco_affairs/dea.html


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As an example, the data on FDI inflows into India almost always reveals Mauritius as the

largest source of foreign investment flows into the country. But Mauritius is widely regarded

as an offshore financial centre (OFC) that is used by most foreign investors as an

intermediary to reach India, predominantly to capitalise on the tax rebates that the country

offers so as to minimise their overall tax burden. Conversely, as Indian companies have

become more globalised, many have chosen to either use their overseas locally-incorporatedsubsidiaries to invest overseas, or have established holding companies and/or special purpose

vehicles in OFCs, or other regional financial centres such as Singapore or Netherlands to

raise funds and invest in third countries. Apart from this so-called transhipping, some parts of

these inflows, from Mauritius in particular and also other OFCs, could also be round-tripping

back to India to escape capital gains or other taxes or for other reasons, not unlike the

investments dynamics between China and Hong Kong, although on a much smaller scale.6

Thus, the bilateral FDI data which only captures the actual flow of funds rather than

ultimate ownership may offer a rather distorted picture of the extent of the linkages

between India and the rest of the world. Consequently, the usefulness of such data for

research and policy analysis needs to be questioned. Any inference from this sort of data

tends to give a misleading picture of reality.

In order to understand the actual or de facto real linkages between India and the rest of the

world, one would need to examine the data on actual ownership of the foreign investment

flows. While data on individual firms that have invested in India may be available via firm-

level surveys, for a more complete picture of FDI inflows into the entire economy one would

need to examine an aggregation of all such firms investing in India from different parts of the

world. This, needless to say, would be a prohibitively costly exercise. A more feasible

alternative would be to examine the data on mergers and acquisitions (M&A) made by global

firms in India and Indian firms globally. The M&A data, which tracks the actual ownership

of purchases and sales, are maintained by several private commercial entities such as the

Bloomberg, Capital IQ, Dealogic, Thomson Financial, Zephyr, etc., (unlike the data on FDI

flows, which is compiled by the national sources).

2. Inward and Outward Direct Investments to and From India

Figures 2a and 2b respectively capture the data available on FDI inflows (reported by the

Indian government) and the M&A purchases (reported by private commercial entities) that

have taken place in India (by source of origin) for the period of 2000-07. A comparison of the

two sets of data clearly reveals the previously discussed inconsistencies.7

It is interesting to note that most of the OFCs such as Mauritius (mainly), Cyprus, CaymanIsland and Bermuda, which comprise a nearly 50 percent share of the total FDI inflows (as

reported by the government sources) do not even appear in the data on inbound M&A to

India. Focussing on the FDI data, only 18 percent of inflows to India have been by the United

States and the United Kingdom combined, while about 15 percent is by the non-United

Kingdom European countries (mainly Netherlands, France and Germany) and about ten

percent by East Asia (mainly Singapore and Japan). In contrast, the M&A data on foreign

acquisitions in India tells quite a different story. The United States is the single largest

6 For a discussion on China-Hong Kong flows within the larger context of intra-Asian FDI flows, see Hattari

and Rajan (2009). Understanding Bilateral FDI Flows in Developing Asia, Asian Pacific Economic

Literature, forthcoming.7 To ensure a degree of comparability with the FDI data we have only included M&A with over 10 percentequity stake in our direct comparisons (Figures 2a, b and 4a, b).


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acquirer of Indian companies (35 percent), followed by the United Kingdom (16 percent) and

the rest of Europe including Netherlands (27 percent) and East Asia (18 percent) (distributed

between Japan, Singapore, Malaysia and Hong Kong). Therefore, almost all of the inbound

acquisitions to India have been made by the United States, Europe and Asia. This appears to

offer a far more informative geographical breakdown of sources of direct investment equity

flows to India compared to the FDI data noted in Figure 2a. It would appear, therefore, that agreat deal of the acquisitions by the United States and United Kingdom in particular have

been channelled via Mauritius.

As noted, similar bilateral data on Indias actual FDI outflows are not publicly available on a

systematic time series basis. While approvals may not provide a fully realistic picture as not

all approvals are realised, available data at least for aggregate actual outflows suggests that

there is a reasonable degree of correlation between approved and actual outward FDI flows

from India.8

Accordingly, the outward FDI approvals data should offer some useful insight

when compared to data on Indias M&A purchases overseas. It is well-known that Indian

businesses have been very active in overseas investments in the last few years, particularly

since 2006 (Figure 3). Anecdotal evidence and examples point to the fact that many of theseinvestments have been in developed countries such as the United States, the United Kingdom

and the rest of Europe. Notable instances would be Tata Steels purchase of Corus and Tata

Motors purchase of Jaguar and Land Rover in the United Kingdom and Hindalcos

acquisition of the Canadian aluminium giant Novelis (Table 1).9

Referring to Figure 4a, one notices that developed countries such as the United Kingdom and

the United States have surprisingly small shares of Indias approved outward FDI (six percent

each) for recent periods for which detailed data are available (2002-08) compared to

Singapore (22 percent), Netherlands (15 percent) and Mauritius and other OFCs in total (25

percent). Hence, over 50 percent of Indias approved FDI appears to have been flowing

towards the financial centres (regional and offshore). Examination of M&A purchases for

more or less the same period (2000-07), however, reveals quite a different picture (Figure

4b).

Canada emerges as the top host country for Indias outbound acquisitions with a 34 percent

share, followed by the United States with a 24 percent share. While Indian companies have

undertaken a number of varied purchases in the United States, the acquisitions in Canada

have been concentrated in resources, including Novelis mentioned previously. Apart from

these, around 16 percent of Indias acquisitions have been aimed at resource-rich countries

(Russia, Egypt, Australia and South Africa) and the rest to the United Kingdom and Europe

(17 percent). The Tata Motors acquisition of Jaguar and Land Rover Brands from the UnitedKingdom do not show up in our data as they were concluded in early 2008. It is likely that an

extension of the data to 2008 would see a jump up in the United Kingdom as a source of

Indian outbound M&A, as would Europe in general, given recent sizeable purchases by

Indias Suzlon Energy of Indian firms and the German wind-power company, REpower, in

2009 (Table 1).

8This trend is visible when one compares Tables 6 and 7 in the chapter on Indian Investment Abroad in Joint

Ventures and Wholly Owned Subsidiaries: 2008-09 (April-March), RBI Monthly bulletin (July 2009). It is

also likely that this association between approval and actual is much tighter in the case of Indias outflows

compared to inflows.9Unlike the pie charts (Figures 2a,b and 4a,b), since we are drawing on secondary sources, the other Tablesand Figures are not restricted to purchases over ten percent equity stake, but it is likely that most are.


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3. Singapores Unique Position

The data in Figures 3a and 3b suggests that Indian companies have been using Singapore,

Netherlands and OFCs as intermediaries to purchase assets overseas, primarily in the

developed world and resource-rich countries. For instance, Tata Steel is said to have financed

the Corus acquisition partly via a debt arranged by a consortium of banks at Tata Steel(United Kingdom) as well as in the form of bridge finance by its subsidiary Tata Steel Asia

Singapore. Therefore, the deal may not even have shown up in Indias FDI statistics or could

have shown up as being concluded via Singapore. While the use of OFCs as tax havens is

well understood, both Singapore and the Netherlands are attractive hosts for holding

companies from India and elsewhere in view of the low and simple tax rates, the large

number of double tax treaties between the two countries and rest of the world, working

knowledge of English, human capital, excellent logistics and air and sea connections. This

explains their attraction to Indian businesses that are eager to internationalise their operations.

Indian businesses have been particularly aggressive in investing in Singapore since the

coming into force of the Comprehensive Economic Comprehensive Agreement (CECA) inAugust 2005. The India-Singapore CECA, which covers agreements relating to trade in

goods, services and investments, was the first bilateral arrangement that Singapore entered

into with a South Asian country, and likewise has India's first such agreement with a

developed country. Amongst the several features of the agreement, one key provision which

has assumed significance from the investment perspective is the renewed Double Taxation

Avoidance Agreement (DTAA). The India-Singapore DTAA is broadly modelled along the

lines of the existing Indian treaty with Mauritius, with exemptions for capital gains tax on

profits from the sale of shares. Owing to the round-tripping concerns between India and

Mauritius noted previously, the DTAA between India and Singapore has included some key

provisions to minimise this problem.10

It may well be that over time, there may be a greater a shift of FDI from Mauritius to

Singapore by both Indian companies needing a springboard to investing globally, and vice

versa for Singaporean and other foreign companies looking to enter the Indian market.

Already, there has been a spurt in the establishment of Indian companies in Singapore (from

1,200 in 2002 to over 3000 or so by 2008),11

and while the FDI data clearly overstates the

significance of Singapore as a destination for Indian investments for reasons discussed

before, the city state still constitutes a substantial portion of Indias overall outbound M&A

(seven percent compared to 22 percent of FDI outflows from India). Apart from Natsteels

acquisition by Tata Steel in 2005, Indian educational institutions and IT companies have been

prominent investors from India into Singapore, while many other Indian companies useSingapore as a regional and even international headquarters. On Singapores part, the

Economic Development Board has consciously tried to woo companies from India and

elsewhere to use the city state as a base by offering attractive tax incentives or grants under

the Regional Headquarters Award or International Headquarters Awards.

4. Conclusion

To conclude, one clearly has to be cautious when comparing the two sets of data (FDI versus

M&A), as the M&A data excludes Greenfield investments. While M&A are growing as the

10

For more details on the key provisions of the India-Singapore CECA, see http://app-stg.mti.gov.sg/data/article/116/doc/FTA_CECA_Information%20Kit.pdf.

11 See http://in.rediff.com/money/2008/mar/19india.htm.
http://app-stg.mti.gov.sg/data/article/116/doc/FTA_CECA_Information%20Kit.pdfhttp://app-stg.mti.gov.sg/data/article/116/doc/FTA_CECA_Information%20Kit.pdfhttp://in.rediff.com/money/2008/mar/19india.htmhttp://in.rediff.com/money/2008/mar/19india.htmhttp://app-stg.mti.gov.sg/data/article/116/doc/FTA_CECA_Information%20Kit.pdfhttp://app-stg.mti.gov.sg/data/article/116/doc/FTA_CECA_Information%20Kit.pdf


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preferred mode of foreign entry, the M&A data are not from national sources. As discussed,

they are sourced from commercial entities and there are questions about consistency in terms

of company coverage and definitions, among other factors. In addition, tracking transactions

based on ownership is always tricky, particularly given the increasing complexity of global

businesses. For instance, is Novelis considered a company from the United States or Canada,

since it is headquartered in Atlanta, Georgia, but registered as a Canadian corporation? Thissaid, the important point is that Indias FDI data at a bilateral level may offer quite a

misleading indication of the extent of real linkages and should be interpreted with extreme

caution, a point that researchers and analysts have failed to appreciate adequately.


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Figure 1: Capital Inflows to and Outflows from India (2000-08)

0

5

10

15

20

25

30

35

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

Years

USD Billion

FDI Inflows

FDI Outflows

Source: Based on Reserve Bank of India Monthly Bulletin (July 10, 2009).

Figure 2a: Share of Total FDI Inflows to India (Per Cent)

by Country of Origin 2000-07 1

(Top Ten Source Countries)

UAE

1%

Others

6%

OFCs2

4%

Europe3

9%Japan

5%

Netherlands

6%

Singapore

6%

UK

8%

USA

10%

Mauritius

45%

Source: Ministry of Commerce and Industry, Department of Industrial Policy and

Promotion India, http://siadipp.nic.in/publicat/newslttr/apr2008/index.htm

(Accessed on 24 July 2009).
http://siadipp.nic.in/publicat/newslttr/apr2008/index.htmhttp://siadipp.nic.in/publicat/newslttr/apr2008/index.htm


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Figure 2b: Share of Total Inbound Acquisitions

in India (Per cent) 2000-07 1,4

(Top Ten Source Countries)

Hong Kong

2%South Africa

1% Others

3%

Netherlands

4%Japan

5%

Malaysia

5%

Singapore

6%

Europe3

23%

United Kingdom

16%

United States

35%

Notes: 1) FDI data are reported for the financial year; M&A data are reported for the calendar

year.

2) OFCs Aggregation of shares of Cyprus, Channel Island, Cayman Island and

Bermuda excluding Mauritius.

3) Europe Aggregation of shares of all of Europe except Netherlands, the United

Kingdom and Russia.

4) Based on data with over 10% equity to be consistent with definition of FDI.

Source: Authors compilations from Zephyr Database.

Source: Reproduced from The Economist, May 28th, 2009 based on data from Dealogic.

http://www.economist.com/businessfinance/displaystory.cfm?story_id=13751556,

(Accessed on 24 July, 2009).

0

5

10

15

20

25

Value (US$billions)

2003 2004 2005 2006 2007 2008 2009*

Years

Figure 3: Indian Outbound Mergers and Acquisitions

50 51 136

187 24927

41

*Year to Date

No. of Deals
http://www.economist.com/businessfinance/displaystory.cfm?story_id=13751556http://www.economist.com/businessfinance/displaystory.cfm?story_id=13751556


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Figure 4a: Share of Total Outward FDI Approvals

by India (Per Cent) 2002-081

(Top Ten Destination Countries)

Singapore

22%

OFCs2

18%

Netherlands

15%Europe

3

9%

Mauritius

7%

United Kingdom

6%

United States

6%

Sudan2%

UAE

2%

Others

13%

Source: Ministry of Finance, Department of Economic Affairs http://finmin.nic.in/

the_ministry/dept_eco_affairs/dea.html (Accessed on 24 July, 2009).

Figure 4b: Share of Total Outbound Acquisitions

by India (Per Cent) 2000-071

(Top Ten Destination Countries)

Others

4%

Canada

34%

USA

24%

Russia

8%

Egypt

6%Singapore

7%

UK

5%

Europe3

12%

South Africa

1% Australia

1%

Notes: 1) FDI data are reported for the financial year; M&A data are reported for the

calendar year.

2) OFCs Aggregation of shares of Cyprus, Channel Island, Cayman Islandand Bermuda excluding Mauritius.

3) Europe Aggregation of shares of all of Europe except Netherlands,

United Kingdom and Russia.

4) Based on data with over 10% equity to be consistent with definition of

FDI.

Source: Authors compilations from Zephyr database.
http://finmin.nic.in/%20the_ministry/dept_eco_affairs/dea.htmlhttp://finmin.nic.in/%20the_ministry/dept_eco_affairs/dea.htmlhttp://finmin.nic.in/%20the_ministry/dept_eco_affairs/dea.htmlhttp://finmin.nic.in/%20the_ministry/dept_eco_affairs/dea.htmlhttp://finmin.nic.in/%20the_ministry/dept_eco_affairs/dea.html


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Table 1: Selected Outbound M&A Transactions of over US$100 million (as of mid-2008)

Acquirer Foreign target Target industry Targetcountry

Approximatedeal value(US$)

Tata Steel Ltd. Corus Group PLC Steel U.K. 14.85 billion

Hindalco IndustriesLtd.

Novelis Inc. Aluminum Canada 6 billion

Sterlite Industries

India Ltd.

Aserco Inc. Mining U.S. 2.6 billion

Tata Motors Ltd. Ford Motors Co.s

Jaguar Limited and

Land Rover Holdings

Automotive U.K. 2.3 billion

Essar Steel Ltd. Algoma Steel Inc. Steel Canada 1.57 billion

United Spirits Ltd Whyte and Mackay

Ltd.

Food and

Beverages

U.K. 1.18 billion

Tata Power CompanyLtd.

30% stake each in PTKaltim Prima Coal and

PT Artumin Indonesia

Energy Indonesia 1.1 billion

Tata Chemicals General ChemicalIndustrial Products Inc.

Chemicals U.S. 1.0 billion

Tata Sons Ltd.Tata Tea Ltd.

30% stake in EnergyBrands Inc.

Food andBeverages

U.S. 677 million

Dr. Reddys

Laboratories Ltd.

Betapharm

Arzneimittel GmbH

Pharmaceuticals Germany 571 million

Wipro TechnologiesLtd.

Infocrossing Inc. Technology U.S 568 million

Suzlon Energy Ltd.

through its subsidiaryAE-Rotor Holding

BV

Hansen Transmissions

International NV

Industrial

Machinery

Belgium 521 million

RanbaxyLaboratories Ltd.

Terapia S.A Pharmaceuticals Romania 324 million

Videocon Appliances

Ltd.

Thomson Multimedia

cathode ray tubebusiness

Technology France 292 million

Jubilant Organosys

Ltd.

Draxis Health Inc. Pharmaceuticals Canada 258 million

Tata Coffee Ltd. The Eight O ClockCoffee Co.

Food andBeverages

U.S. 220 million

Aditya Birla NuvoLtd

Minacs Worldwide Inc. Technology Canada 172 million

United PhosphorousLtd.

Cerexagri S.A. Chemicals France 142 million

Subex Systems Ltd. Azure Solutions Ltd. Technology U.K. 140 million

United PhosphorousLtd.

Advanta NetherlandsHoldings BV

Food andBeverages

Netherlands 119 million

Source: Rajpal, D. and S. Parekh, India Looks Outward: Cross-Border M&A by Indian Corporations

Canadian Considerations, Stikeman, October 2008. Based on data from Capital IQ.

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